In the realm of employment law in the United States, understanding the classifications of employees is crucial for both employers and employees alike. Two important classifications, as defined by the Department of Labor (DOL), are overtime-exempt and highly compensated employees. These classifications have significant implications for employers, particularly in terms of wage and hour regulations.

The U.S. Department of Labor announced last week that it will publish a final rule raising the Fair Labor Standards Act’s minimum annual salary threshold for overtime pay eligibility.

Let’s explore what these classifications entail and the potential impact on employers as a result of the impending increase.

Overtime-Exempt Employees:

Overtime-exempt employees are those who are not entitled to receive overtime pay for working more than 40 hours in a workweek, as mandated by the Fair Labor Standards Act (FLSA). Instead, they receive a fixed salary regardless of the number of hours worked. The FLSA provides specific criteria for determining overtime exemption, primarily based on job duties and salary level.

The primary categories for overtime exemption are executive, administrative, professional, outside sales, and certain computer-related positions. To qualify for exemption, employees must primarily perform certain duties as defined by the DOL and be paid on a salary basis not subject to reduction due to variations in quality or quantity of work performed.

Highly Compensated Employees (HCEs):

Highly compensated employees, as per the DOL regulations, are those who earn a total annual compensation that is above a specified threshold and perform at least one of the duties of an exempt executive, administrative, or professional employee. These employees are subject to a different set of rules compared to standard exempt employees.

The threshold for highly compensated employees is significantly higher than that for other exempt employees. This classification is designed to encompass employees who may not meet the standard duties test for exemption but are compensated at a level indicative of higher job responsibilities or specialized skills.

Implications of the Ruling for Employers:

For employers, adherence to these regulations involves properly classifying employees as either overtime-exempt or highly compensated and paying them accordingly. Misclassification can lead to costly consequences, including back wages, penalties, and potential lawsuits.

The DOL has announced that the minimum annual salary for most overtime-exempt employees will increase to $43,888 on July 1, 2024, and then increase again to $58,656 on January 1, 2025, under a new overtime rule coming soon from the US Department of Labor (DOL). That represents a cumulative jump of 65% over the current salary threshold of $35,568 per year, which took effect in 2020.

Starting July 1, 2027, and every three years thereafter, the salary threshold will be adjusted for inflation. The minimum salary threshold for highly compensated employees will be adjusted with a similar approach – increasing from its current level of $107,432 to $132,964 on July 1 and then again to $151,164 on January 1.

The potential impact on employers becomes particularly relevant when considering changes to the minimum annual salaries associated with these classifications. With an increase in minimum salary levels for overtime-exempt and highly compensated employees, several implications arise:

1. Cost Considerations: Employers would face increased labor costs due to higher salaries for exempt employees. This could impact budget allocations and profitability, especially for small businesses and industries with tight profit margins.

2. Reclassification of Employees: To mitigate increased costs, employers may opt to reclassify certain employees from exempt to non-exempt status, making them eligible for overtime pay. This could result in increased administrative burden and the need for more robust timekeeping systems to track hours worked.

3. Competitive Positioning: Higher salary thresholds could impact employers’ ability to attract and retain talent, particularly in industries where skilled workers are in high demand. Employers may need to adjust their compensation strategies to remain competitive in the job market.

4. Compliance Challenges: Keeping up with changing regulations and ensuring ongoing compliance with wage and hour laws can be challenging for employers. Increased minimum salary levels would necessitate careful monitoring and adjustment of payroll practices to avoid legal risks.

In total, the DOL anticipates about 4 million workers will be affected. Employers of overtime-exempt employees who make less than the new minimum salary will need to either raise those employees’ salaries or reclassify them as nonexempt.

The DOL said it will be providing outreach and education to support its new rule. FAQs, charts, and other guidance will be available this week. The agency also plans to offer webinars and other outreach events in the coming weeks prior to the July 1, 2024, deadline.

By staying informed of regulatory changes and adopting proactive measures, employers can navigate the complexities of employee classification and maintain a fair and compliant workplace environment.